Russia is winning the pipeline race to Europe

October 21, 2009

It’s proving to be a successful week for Russian energy diplomacy. In the space of just a few days, Russia has signed agreements with three key transit countries for two of the Kremlin’s pet pipeline projects.

Both the North Stream gas pipeline under the Baltic and the South Stream pipeline through the Balkans are now one step closer to reality. The progress means that Russia is winning the race to meet Europe’s future energy needs, increasing the continent’s already heavy dependence on Russian energy. But major obstacles still remain.

The good news for Russia is that it has achieved a slew of agreements with transit
countries. In recent days, both Turkey and Serbia have given their permission for Russia to build the South Stream pipeline through their territory. Simultaneously, Denmark has approved the construction of the North Stream pipeline through its section of the Baltic.

The progress on South Stream will be especially welcome to the Kremlin. Construction of the pipeline is now expected to begin next year, and completed in 2015. This means the project is likely be built ahead of Nabucco, a rival gas pipeline project bypassing Russia, which is backed by the EU and the U.S. because it will diversify Europe’s supply sources.

Despite the EU’s backing for Nabucco, Russia has found willing partners among European customers because South Stream looks like the more practical of the two projects. The biggest problem facing Nabucco is — put bluntly — knowing where the gas will come from that will be piped down it. Among major gas producers, only Azerbaijan has so far signed up to the project.

Plans to source gas for Nabucco from Central Asian producers have not borne fruit, not least because of legal and political obstacles to transporting their gas across the Caspian Sea. That leaves Iraq and Iran, two countries where the political risks are immense.

With South Stream, it’s not so hard to see where the gas will come from. To begin with, much of it will be diverted from existing pipelines that head through Ukraine. In the long term, though, many analysts have questioned Gazprom’s ability to meet Europe’s energy needs, because of the immense cost of developing new fields in northern Siberia.

A more immediate problem is whether Gazprom will be able to finance its various pipelines, at a time when Gazprom’s revenues have slumped. The company expects its sales to Europe to drop by 40 percent this year.

Even before the economic downturn, the expense of the projects was daunting. Gazprom estimates the cost of the South Stream at between 19 billion and 24 billion euros — around three times more than Nabucco — and puts the cost of North Stream at 13.4 billion euros. Meanwhile, Gazprom is also mulling major export pipelines to China, and also needs to find tens of billions of dollars to develop the new gas reserves that will eventually be required to fill all these pipelines.

But while the schedule for Gazprom’s new pipelines to Europe could very well slip, they remain much further advanced than the alternatives. Europe will have to live with energy dependence on Russia for many years yet.

One comment

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Hello Juson,
Between us big energy analysts :)

The biggest problem for Nabucco that the biggest gas supplier for pipeline – Turkmenistan failed to provide reliable gas reserves estimates. Russia certainly spreads rumors to undermine credibility of reports.

Here are claims that reserves overstated: -Wars/2009/10/15/Turkmen-president-fires -officials-for-overstating-gas-reserves/ UPI-17271255624191/ ion=posted_news&rid=31692&catid=62

Here is some claim that reserves estimate is right: le.asp?xfile=data/international/2009/Oct ober/international_October1044.xml&secti on=international&col=

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